Openness, Investment and Economic Growth in Asia
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OPENNESS, INVESTMENT AND ECONOMIC GROWTH IN ASIA Dipendra Sinha (Department of Economics, Ritsumeikan Asia Pacific University, Japan and Macquarie University, Australia, Email [email protected]) and Tapen Sinha (Instituto Tecnologico Autonomo de Mexico, Mexico) I. Introduction The purpose of this paper is to explore how growth of openness and the growth of domestic investment contribute to growth of GDP in Asian countries. A large number of papers have looked at the relationship between export and economic growth but until recently no study has looked at the relationship between growth of openness and economic growth (see Sinha and Sinha (1996)). We define openness as export plus import following Summers and Heston (1991). Why should openness and growth be related in a country? Openness has two parts: export and import. Economists have debated the role of export in economic growth at length. There are three channels of connections between economic growth and exports. First, although industrialization is crucial to economic growth, domestic demand may be low. Export provides an outlet for this excess production and generates income (Colombatto, 1990). Second, in the long run, export helps growth because export leads to greater technical progress and more saving (Krueger, 1978). It also improves credit ratings of a country by generating hard currencies and thus makes getting foreign loans easier. Third, export promotion policies improve total factor productivity (Balassa, 1978). Although most researchers talk about trade policy but in their discussion they focus exclusively on export policy. Does that mean that import does not help a country? Why should import be related to economic growth? Publication of high import statistics in the newspapers stirs up government officials. They feel compelled to defend high import statistics. There is an implicit belief that for a country, a growing rate of import is bad but a growing rate of export is good. Economics literature seems to follow the same line: issues of trade are always implicitly taken to mean issues of export. The only study to our knowledge that explicitly looks at import at all is that of Ram (1990). Ram looks at the relationship between growth rate of import and growth rate of real GDP in many developing countries using an augmented production function approach. He finds a positive relationship for some countries. Import of capital goods and energy can help economic growth for an LDC. However, imports may not always aid economic growth: they need to be used efficiently. We also add two very important internal factors affecting the rate of economic growth: growth of investment and growth of population. Population is used as a proxy for the labor force since reliable time series data are not available for a reasonable period of time for all the countries under consideration. Our model in section II derived from a generalized version of the Solow-Swan model makes growth of GDP a function of growth of investment and the growth of population as well. We use data for 19 Asian countries. World Bank (1987) categorizes a number of countries according to their trade orientation for the period 1973-85. Our sample includes countries in all these categories. Hong Kong, Singapore and South Korea were strongly outward oriented according to the World Bank classification. Israel, Malaysia and Thailand were moderately outward oriented. Indonesia, Pakistan, Philippines and Sri Lanka were moderately inward oriented. Bangladesh and India were strongly inward oriented. Therefore, our data span the entire range of countries classified by the World Bank. As pointed out earlier, previous literature look solely at the relationship between export and economic growth. Early efforts investigating the relationship between export and economic growth include Emery (1967), Michaely (1977), Balassa (1978), Krueger (1978) and Feder Volume 49, No.4 91 (1982). Numerous other studies also appeared on the subject. Some of these are multi-country studies while others concentrate on a single country. Recent papers include Ahmed and Harnhirun (1995), Dollar (1992), Harrison (1995), Frankel, Romer and Cyrus (1995), Krueger (1990), Sengupta (1994) and van den Berg and Schmidt (1994). Edwards (1993) provides an excellent review of the many previous studies. The plan of the paper is as follows. In part II, we develop a model relating the rate of growth of GDP, the rate of growth of investment, the rate of growth of openness and the rate of growth of population. In part III, we look at the empirical results. Part IV gives a summary of the paper and draws some conclusions. II. The Model Define the following variables: Y(t) = real GDP adjusted for terms of trade as a (continuous) function of time; K(t) = capital stock at time t; N(t) = labor in person-hours in efficiency units at time t; L(t) = population at time t; T(t) = labor productivity or technical change at time t; R(t) = value of trade (real export plus real import) at time t; We define a continuous time model of the economy as follows: There is a continuous time technology given by the following function: Y(t) = F(K(t), N(t)) (1) and we assume F is homogenous of order 1 in K and N. This formulation is the standard Ramsay-Solow-Swan model but in continuous time. We will use the following form of (1) by using the fact that F is homogeneous of degree 1: Y(t)/N(t) = f(K(t)/N(t)) (1) Capital stock evolves over time as a proportion of real GDP but after correcting for depreciation at a constant rate d. This is the simplest formulation of Solow (1956). dK(t)/dt = sY(t) - dK(t) (2) We assume that the population grows at a constant rate n over time: dL(t)/dt = nL(t) (3) Labor productivity/technology is assumed to change with improvements in per capita capital stock K/L. This is an extension of Arrow’s(1962) learning by doing model where a is the learning coefficient. It also captures the spirit of endogenous growth model of Romer (1986). We will assume that a is influenced by import and export. There are two separate sets of reasons why import and export (or trade) induces a higher value of a. First, more sophisticated imported technology stimulate output growth (see Bardhan and Lewis (1970)). Feder (1982) shows how export can produce a higher level of productivity. Second, a purely domestic source stemming from local technological improvement can be proxied by export and a foreign source of knowledge related to innovations generated in other countries can be proxied by imports (see Edwards (1992) for more details on the rationale of using export and import as proxies in this context). Let R(t) denote trade (that is, real export plus real import). In our model the parameter a encapsulates all of these effects of import and export. dT(t)/dt = a(dR(t)/dt)K(t)/L(t) + lT(t) (4) Equation (4) summarizes the rate of technological change. In the standard neoclassical growth model, the technological change is exogenous. This exogeneity means equation (4) simplifies to: dT(t)/dt = lT(t) (4¢) This is equivalent to assuming the value of to be zero. In this sense, (4) is a generalization of Solow-Swan neoclassical model (Solow (1956), Swan (1956)). In addition, we have the following identities: N(t) = T(t)L(t) (5) Equation (5) relates population to effective labor. k(t) = K(t)/N(t) (6) Equation (6) defines capital intensity. From (2) using (1), we get dK(t)/dt = sNf(k(t)) - dK(t) which simplifies to 92 THE INDIAN ECONOMIC JOURNAL [dK(t)/dt]/K(t) = sf(k(t))/k(t) - d (7) Equation (7) summarizes the rate of change of capital stock to per capita capital stock . Differentiating equation (5), we get, dN(t)/dt = L(t)dT(t)/dt + T(t)dL(t)/dt; which after rearranging gives us [dN(t)/dt]/N(t) = [L(t)/N(t)]dT(t)/dt + [T(t)/N(t)]dL(t)/dt (8) By substituting (3) and (4) in the right hand side of (8), we get [dN(t)/dt]/N(t) = [a(dR(t)/dt)K(t)/L(t) + l T(t)] + nL(t)/L(t) or, [dN(t)/dt]/N(t) = a(dR(t)/dt)k(t) + l + n (9) Differentiating equation (6) with respect to t we get dk(t)/dt = [dK(t)/dt]/N(t) - K(t)[dN(t)/dt]/(N(t))2 This gives the following expression for [dk(t)/dt]/k(t) = [dK(t)/dt]/K(t) - [dN(t)/dt]/N(t) (10) By substituting (7) and (9) in (10), we get [dk(t)/dt]/k(t) = sf(k(t))/k(t) - a(dR(t)/dt)k(t) - l - n - d; On the other hand, using (1¢) we get Y(t) = N(t)f(k(t) (11) and using (5) in (11) we get Y(t) = T(t)L(t)f(k(t) (12) Totally differentiating (11), we get dY(t)/dt = [dT(t)/dt]L(t)f(k(t)) +T(t)f(k(t))[dL(t)/dt] + f’(k(t))dk(t)/dt The right hand side simplifies to yield [dY(t)/dt]/Y(t) = a(dR(t)/dt)K(t)f(k(t))/Y(t) + lT(t)L(t)f(k(t))/Y(t) + T(t)L(t)n/N(t) + f’(k(t))[dk(t)/dt]/Y(t) or, [dY(t)/dt]/Y(t) = a(dR(t)/dt)k(t) + l + n + f’(k(t))[dk(t)/dt]/Y(t) (13) If we assume Inada (1963) condition to hold for the per capita production function f in equation (1’), we can show that a steady state solution k* to (13) exists.